Fiscal Purgatory in New York

New York Governor Hugh Carey, left, and New York City Mayor Abe Beame, right, meet with President Gerald Ford at the White House in Washington, May 13, 1975, in an appeal for $1.5 billion in emergency aid for New York City.

This article appears in the Summer 2017 issue of The American Prospect magazine. Subscribe here.

Fortunes made in finance, real estate, and media give New York City more billionaires than any other single locale worldwide. With nearly half its population either in poverty or near poverty, it is not surprising that New York has the greatest income inequality among the 25 largest U.S. cities. Generally, inequality goes hand in hand with low mobility, but paradoxically, New York is the exception. Certain of the city’s public institutions and its tax policies provide opportunities for those starting in the lower income range. New York City has among the highest rates of upward mobility among all U.S. cities.

Research by the Equality of Opportunity Project shows that the publicly supported City University of New York has one of the highest bottom-to-top mobility rates of any university, public or private, in the country. The city has one of the highest earned income tax credits of all cities, as well as extensive public hospital and mass-transit systems, and subsidized child care. These policies reflect a long tradition of expansive and egalitarian local government. New York’s liberal political order has also created a hospitable environment for immigrants and strivers from the world over.

This legacy came under severe assault during the 1975 fiscal crisis, as Kim Phillips-Fein makes abundantly clear in her masterful new book, Fear City: New York’s Fiscal Crisis and the Rise of Austerity Politics. Phillips-Fein, a historian teaching at New York University, challenges the conventional view that most New Yorkers were united in “repudiate[ing] an older tradition of irresponsible altruism” and “accepted the need for austerity and chipped in.”

Rather, as she painstakingly documents using a trove of archival material, Phillips-Fein shows that the leaders of the large New York City banks and corporations teamed with President Gerald Ford’s conservative economic advisers to use the city’s debt and budget crisis to roll back an expansive government and the liberal impulses undergirding government economic intervention.

The occasion was the inability of New York City to roll over its debt in financial markets. In his October 1975 National Press Club speech refusing federal aid (which prompted the New York Daily News headline “Ford to City: Drop Dead”), Ford complained about public-sector pay, the “extravagance” of the city’s municipal hospitals, and free tuition at the City University of New York. As Phillips-Fein writes, Ford’s message was that “refusing aid to New York meant taking the entire nation in a new direction, leading it away from the reckless spending of the Great Society.”

In June before Ford’s speech, New York Governor Hugh Carey, under the tutelage of financier Felix Rohatyn, set up the Municipal Assistance Corporation (MAC) to deal with the flood of maturing short-term city debt by issuing long-term bonds backed by city sales tax collections. MAC’s initial foray in credit triage met with limited success, and over the course of the summer and into the fall, as the city teetered on the edge of bankruptcy, the major creditor banks eventually saw an opportunity to assert control over the city budget and insist on stringent austerity measures. The opportunity was realized in early September with the passage of state legislation establishing the Emergency Financial Control Board (EFCB) that stripped Mayor Abe Beame of his budget control.

While the seven-member EFCB included the mayor, and the city and state comptrollers, the governor had a seat and appointed three private citizens, giving him control that was essentially wielded by the three corporate chieftains he appointed. Until 1986, the EFCB had veto power over revenue forecasts, labor and other contracts, borrowing, and the total size of the city budget. The mayor and city officials retained authority to decide priorities within the budget total.

Budget control by unelected corporate leaders was the price demanded by the bankers and their political allies in exchange for agreeing to stop-gap financing and for Ford to eventually consent to federal loan guarantees, which happened in December of 1975.

Austerity ensued on a monumental scale—more than one in five city jobs, including police, fire, and sanitation, were cut; the school budget was slashed (class size skyrocketed and arts and sports programming was terminated); child-care centers and neighborhood health clinics and drug treatment programs shuttered; and free college tuition ended. Mass-transit maintenance and capital spending were derailed. Phillips-Fein describes the battles waged by average New Yorkers in protesting these attacks on everyday quality of life and public safety—stories rarely told in narratives about the city’s fiscal crisis and its aftermath. She also examines the desperation, anger, and hopelessness that boiled over in the riot during the 1977 blackout.

WAS NEW YORK CITY living beyond its means? Certainly, Mayors John Lindsay and Abe Beame failed to keep municipal spending in reasonable alignment with revenues and recklessly relied on borrowing to fund operating expenses. As a novice mayor, Lindsay headed off public worker strikes with generous settlements. But like most severe fiscal crises, forces beyond the control of the city were a big part of the story. Federally subsidized housing and highways fueled residential and corporate suburbanization, and a once-extensive manufacturing base was both pushed and pulled away from urban centers by broader developments. The broader economy weakened in the early 1970s, reducing city tax revenues. Even before austerity set in, forces were well under way that reduced New York’s population by a million and cost over half a million jobs during the 1970s. Changes in the financial sector and in regulations opened up wider investment vistas for commercial banks, lessening the attractiveness of municipal bonds.

Phillips-Fein marshals a strong case that there was nothing inevitable about the austerity response to fiscal crisis. The financing provided by the Municipal Assistance Corporation could have been combined with federal assistance and more generous sharing of financial responsibility for Medicaid or public assistance. Policies such as these would have moderated the severity of retrenchment.

But the mid-1970s was a period when financial and corporate chieftains banded together to push back against regulatory and economic policies at all levels of government that they saw as standing in their way as they eyed emerging global opportunities. This was a period of the forceful assertion of corporate influence in the political sphere that, among other things, thwarted the union movement’s push for federal labor law reform under Jimmy Carter and paved the way for a Reagan presidency, marking the end of a semblance of broadly shared prosperity and ushering in the post-1970s era of the concentration of income gains at the top.

The 1970s saw the transformation of liberalism as much as the consolidation of conservatism. While Phillips-Fein’s book illuminates President Ford’s decision-making on the question of aiding New York City, she devotes relatively little attention to the policy options considered by Governor Carey in ultimately proposing and signing the legislation that shifted city budget control to the bank-dominated EFCB. Carey’s voting record in Congress was that of a liberal Democrat; his actions as governor reflected the ascendance of an unabashed business agenda and the eclipse of New Deal–Great Society liberalism.

Nor does Phillips-Fein’s narrative shed new light on the discussions within New York’s labor movement that led to its acquiescing in austerity, beyond the fact that AFSCME District Council 37 leader Victor Gotbaum feared that municipal bankruptcy could lead to the abrogation of the city’s collective-bargaining agreements. The billions in pension fund capital that municipal unions invested in MAC bonds might have made the difference in staving off bankruptcy and in securing federal loan backing. Eventually, Gotbaum and his fellow labor leaders joined with David Rockefeller and other business leaders in support of an economic policy paradigm consisting of business property tax breaks, personal income tax cuts, and a decidedly pro–real estate local economic—development agenda.

While they might have had some promising policy ideas, liberals and their labor allies obviously were not able to marshal the political support within the city or in Albany to avert the austerity solution.

Core components of New York’s expansive approach to government, while somewhat shrunken, continued in the aftermath of the fiscal crisis. In the years since, city leaders have assiduously balanced the budget, but at costs to the city’s tradition of egalitarian public institutions. While city government staffing levels gradually rebounded, urban ambitions remained constrained, particularly for the 20 years under Mayors Rudy Giuliani and Michael Bloomberg.

IT WAS ONLY WITH Mayor Bill de Blasio’s establishment in 2014 of universal pre-kindergarten covering all 75,000 four-year-olds that the city started thinking big and bold—after a four-decade hiatus. On the other hand, the near-complete deference to real-estate interests established in the wake of the fiscal crisis continues as if it were a skyscraper anchored to Manhattan bedrock.

A young Donald Trump makes an appearance in Fear City when he secured one of the lucrative property tax breaks the city continues to dole out to developers. The taxpayer tab for Trump’s 1976 deal to build the Grand Hyatt Hotel came to $360 million as of 2016, a sum surpassed many times over courtesy of property tax breaks Bloomberg extended to developers in the Hudson Yards district beginning in 2005. Curiously, the justification provided by Bloomberg’s budget director was that Manhattan developers had come to expect such tax breaks, so therefore they must be provided, The Bond Buyer reported.

While de Blasio might have moved beyond New York liberalism’s embrace of austerity, the current Democratic governor, Andrew Cuomo, has touted his adherence to a 2 percent state spending cap and a rigid local property tax cap (applicable to schools and municipalities outside of New York City) set at the inflation rate or 2 percent, whichever were lower. His rationalization is that state taxes had grown faster than personal income over the 50 years from 1960 to 2010, and that this had stifled growth. Ironically, if you start that analysis at 1975 or later, income has grown faster than taxes. In essence, Cuomo is justifying Albany’s current budget austerity because state spending grew faster than income from 1960 to 1975, mostly years when a free-spending Nelson Rockefeller, later Ford’s vice president, governed the state. As part of budget horse-trading, Assembly Democrats have acquiesced to Cuomo’s austerity. That austerity has led to thousands of teacher layoffs and sharply diminished funding for community colleges, youth and senior services, public health, and public safety.

The budget discipline mandated by the act establishing the EFCB has left the city with one of the most transparent budget processes of any large government in the country, and its borrowing practices are closely scrutinized. Other than the area of budget process, the fiscal crisis era did not impose any lasting restrictions on the city’s budget authority. The state constitution has long limited the city’s authority to change tax policy, except for setting the property tax rate. Governors and the Republican-dominated state senate typically keep New York City mayors on a short leash, partly because it helps them raise campaign contributions from real-estate and financial interests. In recent years, that has meant killing mayoral proposals to fund pre-kindergarten and affordable housing with a progressive city income tax hike or a “mansion tax” on high-valued property transactions.

In mandating paid sick days and acting in other ways to improve pay and opportunities for low-wage workers and to provide protections for freelance workers, New York City’s progressive mayor and city council are taking steps to move beyond the longstanding “hands off” economic paradigm. Wage growth in the lower half of the distribution has been better than the national average in recent years, the official unemployment rate is the lowest in the 40 years of Bureau of Labor Statistics record-keeping, poverty has come down, and this is the first local recovery since the 1960s not dominated by a Wall Street speculative boom.

In the wake of New York City’s turn toward austerity and the ascendance of corporatist national economic policies, the richest 1 percent captured two-thirds of all income growth in the city, boosting their share of total income from 12 percent in 1980 to nearly 38 percent in 2010. New York City’s austerity politics weren’t solely responsible for the post-1970s rise in income inequality, yet they were certainly a contributing factor. The top 1 percent’s share has continued to rise in the first half of this decade, reaching a little over 39 percent in 2015, but the concentration of income gains taken by the top has been a little under half. A small step, to be sure, but at least one headed in the right direction.

To further escape the austerity mind-set, the city needs to keep using budget and other policies to build on institutions providing avenues of upward mobility, but also policies that raise wages and incomes and reduce poverty. And given President Trump’s vicious anti-immigrant actions, the city also needs to remain vigilant in protecting its vast immigrant community, which has played such a critical role in reenergizing New York’s neighborhoods in recent decades. Reasserting the best of its egalitarian legacy may finally enable New York City to close the book on Fear City.